The Minimum Required

Our View: While The Immediate Impact Of A Minimum Wage Hike Might Be Mixed, Working Families And Nation's Economy Stand To Benefit In The Long Run

July 24, 2009

The minimum wage rises from $6.55 to $7.25 an hour today, the last of a three-step increase approved by Congress two years ago in order to return some measure of relevancy to the federal standard that had been stuck at a paltry $5.15 for a decade.

For the estimated 4.5 million workers who stand to benefit, this will be a cause for celebration. Others fear that what amounts to a 10 percent wage increase could not be more disastrously timed. They believe employers already suffering in a recession will have little choice but to lay off more workers.

So who is correct? Certainly, it's not hard to find economists who will argue both sides of the issue. But inevitably, the debate moves toward a basic truth: When a commodity increases in price, a business will be inclined to use less of it. That holds true whether it's gasoline, raw materials or labor.

But real-world experience of minimum wage laws has turned out to be altogether different. Even with today's increase, nearly half the country will be unaffected. That's because 19 states already have minimum wage laws that are equal to or higher than the federal standard.

In many states, the effect will be modest because prevailing wage rates are already higher. That's particularly true in the Northeast. When Maryland raised its minimum wage above the federal standard several years ago, the impact was negligible for this reason.

But even when a minimum wage increase is significant, the impact on unemployment is usually too small to be measured. There are simply much bigger factors involved in job creation and retention. That's why some of the states with the highest minimum wages, New Mexico ($7.50), Connecticut ($8) and Vermont ($8.06), can have some of the nation's lowest unemployment rates, 6.8 percent, 8 percent and 7.1 percent, respectively.

Critics of the 71-year-old minimum wage law also tend to overlook its positive effects. An analysis by the Economic Policy Institute, a nonprofit think tank, estimates that 430,000 single parents with children under age 18 will benefit from today's increase.

Indeed, as the EPI study shows, single parents benefit disproportionately from a minimum wage increase. Most of them are female, and a significant number of them are minorities. Increasing their take-home pay is one of the most effective strategies available to fight poverty in this country - and reduce the cost of government assistance.

There is also likely to be a positive ripple effect on the economy as workers earning 70 cents more per hour have that much more to spend. Multiply that across the millions of low-income wage earners and that's a $5.5 billion mini-stimulus package.

Even at $7.25 an hour, the minimum wage still doesn't assure that hardworking Americans will be able to earn enough to support themselves and their loved ones. But with today's increase, at least the law comes a bit closer to meeting that goal.